A perfectly competitive market has demand Q = 100 - P and supply Q = P - 10. An individual firm has MC = 10 + 2Q.
(a) What is the market equilibrium price and quantity?
(b) How much output should the individual firm produce?
(c) Although it is has been claimed that this market is perfectly competitive, do your answers to parts (a) and (b) suggest differently?
(a) Setting supply = demand gives the equilibrium price of 55 and the equilibrium quantity of 45.
(b) The individual firm has marginal revenue equal to the market price of 55 and sets it equal to marginal cost to maximize profits. Hence they produce 22.5
(c) Yes, the answers to parts (a) and (b) suggest that the market is not perfectly competitive because the firm from part (b) produces such a large fraction of total market output and hence the assumption of a large number of small firms is not satisfied.
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A) unemployment B) net exports C) taxation factors D) salary increases
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